Sunday, January 24, 2010

On last week's post about the Supreme Court's decision to strike down campaign-finance laws like McCain-Feingold, the discussion centered on the nature of a corporation and whether a libertarian could support its existence.

I'll say truthfully that I'm not entirely sure what I think about this issue and have some reading up / thinking to do. I would absolutely like to explore it some more and determine what I believe with more certainty. For this purpose, I'm re-posting a comment I left and would love to hear your thoughts and arguments. Links to other good resources on this issue are certainly welcome too:

As for the origin of corporations, I don't see why as a matter of voluntary cooperation and by means of contractual agreements made on a free market, individuals could not pool together their savings to provide capital for a business, voluntarily agree to rules governing risk and liability in the event of bankruptcy, and appoint managers to run the business- something akin to a corporation.

13 comments:

Anonymous
said...

One thing that should be examined is whether or not the corporate entity might have emerged absent government statutes. The idea of the corporate entity is largely a fabrication of the law. That's doesn't make it bad in and of itself, but it's a fact to be considered.

As I understand it, prior to the corporate entity you had partnerships of various shapes and forms (which still exist today) but you also had something called a "joint stock company" which was an ancestor to the modern corporation. This entity had many of the same characteristics of the modern corporation but there was more liability borne by the stockholders.

I don't know if thinking about this type of structure adds anything to the discussion.

I also think there's nothing against companies. But one thing I wonder about is if really big companies (which can get very uncontrollable because of their size so that they work inefficent) are attracted by state, because of progressive taxes. The tax percentage has a maximum so high income is preferred.

"One thing that should be examined is whether or not the corporate entity might have emerged absent government statutes." Exactly. That's my question. And the implication of the question as I phrased it, is that it seems to me that there's no reason why not.

And I don't see why the concept of the corporation would be anything libertarians would have a problem with... it's just a legal arrangement between free-thinking individuals to raise capital and dissipate risk, imo- and is as old as the hills: the Dutch East India Trading Co. started with this sort or arrangement in the 1600s.

It brings the market efficiency of a floating stock price to it's capitalization, and of course we need laws to provide the corporation the same sort of rights as individuals enjoy under the US Constitution... like freedom of speech. I've always thought that America's treatment of corporations as citizens, really, is one of the things hat made our economy so vital...

Some libertarians worry that granting it what they see as special privileges like limited liability is an interference by the government in the market. That the notion of a "legal entity" that is not a person is an absurd contrivance of government. I want to hear some of those guys really light up this thread so I can pick everyone's brains.

The problem with corporations is that they are rewarded for becoming bigger. The problem with bigger means more of an attractor for corruption (more money) and a greater positive or negative effect on our economy. Remember too big to fail. A completely unregulated free market, or at least a bare bones structure allows corporations to take over, but tax breaks for big business do as well. If we treat corporations as an individual why shouldn't they pay greater tax rates like a rich individual. This would help keep their growth in check...

The bottom line is small business cannot fulfill all of the solutions of our economy. Sectors like oil, banking/financing, auto manufacturing etc. operate more efficiently and effectively when a big company is behind it. It is easier to regulate, can afford to recall bad products, can afford testing and has the capital for massive products neccessary to reach a level of production efficiency that brings a fair price to the consumer. But small business keeps the corps in check and bring to market new ideas and concepts that are beneficial to the consumer. In a free market big business and small business each has a place, but the key is balance... and developing the regulation to achieve that balance without completely impeding the balancing action of the free market economy. This housing crash-caused depression would not exist if it wasn't a government mandate to make high-risk loans, and corporations acted responsibility.

Last pont- People keep business in check. When a business is known to be corrupt, backwards and unwilling to serve the customer, don't purchase their products work for them or buy stock. If we took a little time to only support businesses that had good business practices we could make a dent in the corruption that occurs. People have the power if they only realize it.

The problem with 'limited liability' is that the little guy doesn't get it as completely as a 'large' corporation.

If you were to form a corporation or any of the other 'limited liability' business entities and then try to get a loan at the bank without waiving your right to limited liability you would be laughed out of the bank.

So, in big business you have a small group of people that can get loans they don't have to pay back, ignore thier bosses, ('caused they picked them), and don't give a shit about the owners of the business, because if they don't like it, the owners sell thier stock...

What's even weirder, as an executive of a Fortune 500 company, you don't try to make money, you try to meet the market expectations.

What I mean is financial analysist for brokers determine what they think is going to happen to your company in the next year. If they say you are going to have a 5% growth in income, then that is your benchmark. You don't want to do better than that, and you don;t want to do worse...

If you are making more, accountants are told to go and find assets to 'write off'. If you are making less, accountants are told to go find expenses that need to be 'capitalized'.

Oh, and when the auditors come and question what was done... well, guess who pays those guys? m-a-n-a-g-e-m-e-n-t.

If we start from the libertarian view that I cannot delegate to others any rights I don't already possess as natural rights, then I think we can see the good and bad points of corporations as currently exist.

People have a right to freely associate, to spend their money as they wish, and to sell items they make or possess as long as fraud isn't involved.

So, a corporation as a free association of people, that earns money by selling things or providing a service, and spends that money as it wishes (reinvest in R&D, shareholder dividends, acquisitions, management bonuses, employee bonuses, political contributions, etc) seems like a reasonable extension.

As an individual, I can also insure against risk, or I can self-insure and accept the consequences.

However, in personal life many people don't proactively insure and also refuse to accept the consequences of misfortune, looking instead for deep pockets they can reach into. This is clearly theft, and whether it succeeds depends on how sympathetic they can make their story for the jury (or if the deep pockets make the calculation that it's cheaper to pay them off than keep with the suit.) This is very similar to what a bunch of corporations recently did. :-) If the government had just zipped its pockets shut instead of standing on its head to let all the money fall out, things would have been okay. Think of all the entrepreneurs who would have loved to buy up assets from GM on the cheap and put them to better use.

If I negligently or intentionally do something that harms another person, I will be prosecuted and punished, with fines or jail time. If one individual in a corporation is clearly accountable for a misdeed, the same could apply. But if a management team, or a board of directors as a group votes on a decision that ends up in injury or death, what can be done? Sentence the corporation to a year in prison and divide it among the top management team? It seems the usual solution is to simply levy fines. Ie, if money is the "life blood" of the corporation, drain it a little bit. I'm reminded of a technique that was used 200 years ago to kill people with impunity. A group of people (ie, a mob) would link arms and start running towards the person, who would eventually be trampled. But no one person was individually entirely responsible for the death, so how could anyone be charged?

On another front, where does bankruptcy fit into this? I searched around a bit to try to find the libertarian view of personal bankruptcy, and I found some articles on ways to fix the current system but I didn't find any calls for abolishing it. Does that imply that an individual has a natural right to a fresh start in the case of misfortune? If so, does that same right apply to the corporation, or is corporate bankruptcy simply a form of lubrication that keeps the system moving and prevents the fall of a corporation from turning into a dogfight among its various creditors to get their chunk of flesh first?

I think the biggest leap in moving from individual to corporation is the limited liability aspect. As an individual, I can insure against liability but I have no way to eliminate it, or declare it away. In fact, as a private pilot I can have a passenger sign a waiver saying they understand that occasionally flights don't always end as planned and they agree not to sue me, but they or their heirs can still sue me. I simply cannot make the liability disappear.

So why is that a fundamental aspect of the corporation? Because if it weren't, many businesses simply wouldn't work. Would you take a job as CEO of an airline if you knew that you could personally be sued by every passenger's family after a crash, even if you had set up a great safety and training program and done everything you could to make that airline safe?

Maybe limited liability really is a nod to pragmatism and not supportable by purist libertarian argument.

Personal opinion: In the 1700's men in several countries went to work on the problem of securing liberty for the people. Separation of powers, limited government and human rights were discussed and written about. They were trying to figure out how to keep the good things about group efforts and concentrations of power while allowing the people to live and work with minimum interference. They found ways to balance the existing and necessary forces against each other in constructive ways, BUT they had no way of knowing that technology would enable the corporation to acquire unforeseen power. Advances in the ability to build enormous buildings, high speed transportation and instant global communications now enable a corporation to focus the efforts of millions on achieving its goal of maximum profit, without no individual responsible for (unimaginably huge) negative consequences. The ability of a modern corporation to oppress the individual was not foreseen and is not included in the whole 'separation of powers' thinking of 300 years ago. Corporations have insinuated their influence into every power included in the balancing act - legislative, judicial, executive - and thrown the whole thing into disarray. Much to the detriment of individuals who want to feel secure in their persons and enjoy the fruits of their labors.